Pros and Cons of Using Discount Stock Brokers

Perhaps you know what stocks you want, and you can make your own investment decisions. All you need is a convenient way to transact your buy/sell orders. In that case, go with a discount broker. They don’t offer advice or premium services — just the basics required to perform your stock transactions.

Discount brokers, as the name implies, are cheaper to engage than full-service brokers. Because you’re advising yourself (or getting advice and information from third parties such as newsletters, hotlines, or independent advisors), you can save on costs that you’d incur if you used a full-service broker.

If you choose to work with a discount broker, you must know as much as possible about your personal goals and needs. You have a greater responsibility for conducting adequate research to make good stock selections, and you must be prepared to accept the outcome, whatever that may be.

For a while, the regular investor had two types of discount brokers to choose from: conventional discount brokers and Internet discount brokers. But the two are basically synonymous now. Through industry consolidation, most of the conventional discount brokers today have fully featured websites, while Internet discount brokers have adapted by adding more telephone and face-to-face services.

Charles Schwab and TD Ameritrade are examples of conventional discount brokers that have adapted well to the Internet era. Internet brokers such as E*TRADE, TradeKing, Scottrade, and thinkorswim have added more conventional services.

What discount stock brokers can do for you

Lower cost: This lower cost is usually the result of lower commissions, and it’s the primary benefit of using discount brokers.

Unbiased service: Because they don’t offer advice, discount brokers have no vested interest in trying to sell you any particular stock.

Access to information: Established discount brokers offer extensive educational materials at their offices or on their websites.

What to watch out for

Of course, doing business with discount brokers also has its downsides, including the following:

No guidance: Because you’ve chosen a discount broker, you know not to expect guidance, but the broker should make this fact clear to you anyway. If you’re a knowledgeable investor, the lack of advice is considered a positive thing — no interference.

Hidden fees: Discount brokers may shout about their lower commissions, but commissions aren’t their only way of making money. Many discount brokers charge extra for services that you may think are included, such as issuing a stock certificate or mailing a statement.

Ask whether they assess fees for maintaining IRAs or for transferring stocks and other securities (like bonds) in or out of your account, and find out what interest rates they charge for borrowing through brokerage accounts.

Minimal customer service: If you deal with an Internet brokerage firm, find out about its customer service capability. If you can’t transact business on its website, find out where you can call for assistance with your order.